JLL: Europe's direct commercial investment hits EUR 244bn in 2007

Direct commercial real estate investment in Europe totalled EUR 244 bn last year, 4% lower than 2006, Jones Lang LaSalle has estimated in its European Capital Markets Bulletin 2007.

Volumes remained strong across Continental Europe and increased 7% year-on-year to EUR 173 bn. But the UK was hit harder than other countries by a slowing in the property sector and volumes slipped by 22% year-on-year to EUR 71 bn. The UK, Germany and France accounted for 63% of the total investment across Europe last year.

'At the start of 2007, we were questioning whether some of Europe's more mature markets (the UK especially) had reached their natural yield floor, as financing costs increased in line with interest rates rises. At that time very few people could have predicted the credit crunch and the severity of the tightening of real estate credit markets that followed', said Tony Horrell, CEO of European Capital Markets. 'The increased cost and lower availability of credit defined the top of the market cycle. Despite this, some countries, such as Belgium, France, Germany and Spain, still saw record volumes in 2007', he added.

According to Horrell, the UK market has undergone rapid re-pricing and is expected to be a target for many investors in 2008. In continental Europe there is still a misalignment of counter-parties' price expectations, as both denial and acceptance pervade the market. 'We are living in a very different world now. The transaction process across Europe has changed from even less than a year ago; it is more protracted, lot sizes are smaller, the investor spectrum is narrower and the focus is asset specific and on pricing characteristics, rather than markets as a whole,' he added.

Cross-border investors continued to dominate in 2007 accounting for EUR 153 bn (63%) of activity, but during the second half of the year there was a noticeable swing towards domestic deals, which accounted for over 40% of activity compared to below 35% in the first half of the year, as investors sought comfort in their local market.

Increased clarity over pricing and confidence is expected to return to the market later in the year. However, this is likely to be too late to avoid European transaction volumes falling by 25% overall in 2008 as a result of first half falling values and slow investment activity. Nigel Roberts, chairman of European Research at JLL, added: 'We anticipate limited rental growth and negative gross returns across Europe as a whole in 2008.'